Global Asset Allocation Strategy
February 2020
Investments │ Wealth Management
Enjoy the (bumpy) ride
Enjoy the
(bumpy) ride• We recommend a neutral stance across regions as risks have
turned increasingly two-sided. Political and lingering macro
concerns weigh on Europe, Japan and EM, while high valuations
and the increasing IT concentration is a growing risk in the US.
• We continue with a balanced cyclical stance in the sector
strategy, with overweights in Energy and Healthcare, and
underweights in Utilities and IT.
EQUITY STRATEGY: selective bets within sectors
FIXED INCOME STRATEGY: keep the EM overweight
• We think equities have a good chance of outperforming bonds
and therefore stick to our overweight. However, given the high-
strung market, the likelihood of a setback has increased and one
is already underway. Without lasting effects on fundamentals,
however, we consider such pullbacks as buying opportunities.
• A slowly improving cyclical outlook and stronger earnings growth
will underpin the stock market performance. Historically low
yields will also continue to support both the market and the
economy, although they are unlikely to veer much lower.
ODDS STILL FAVOUR TAKING RISK
February 2020
• Generally, risk-taking is needed if any return is to be had in this
space, where most government yields are very low or even
negative. Riskier credits yield more, and among them we prefer
EM debt. OW EM Debt, UW government bonds.
• We expect modest returns from fixed income during 2020 as
yields are low and probably will not head much lower.
Market performance & recommendations
All assets have had a good run, but equities stand out
Current allocation Previous allocation
ASSET ALLOCATION - N + Comments
Equities
Fixed Income
EQUITY REGIONS - N +
North America
Europe
Japan
Emerging Markets
Denmark
Finland
Norway
Sweden
EQUITY SECTORS - N +
Industrials
Cons Discretionary
Cons Staples
Health Care
Financials
IT
Comm. Services
Utilities
Energy
Materials
Real Estate
BOND SEGMENTS - N +
Government
Investment Grade
High Yield
Emerging MarketsSource: Refinitiv Datastream / Nordea
3
Global growth is stabilizing / improving
Source: OECD / Nordea
Manufacturing is improving and services is holding up.
Source: Refinitiv Datastream / Nordea
• The global manufacturing sector has stabilized and seems to be picking up, while the service sector PMIs are still at levels consistent with decent growth.
• While there are still more OECD-countries expected to decrease rather than increase GDP growth in 2020, the outlook is improving.
• We expect a moderate growth pick-up supported by loose financial conditions and healthy household finances, but held back by geopolitical uncertainties.
0
5
10
15
20
25
30
35
40
45
50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Accelerating growth Decelerating growth Negative growth
Number of countries
4
OECD expects more countries to increase GDP-growth
US growth is supported by healthy household finances
Source: Refinitiv Datastream / Nordea
US unemployment rate is at a multi-decade low and wages are rising
Source: Refinitiv Datastream / Nordea
• The US unemployment rate is the lowest since the 1960s. Unemployment rates in Germany, UK, Japan are also at multi-decade lows.
• Wages have risen, but consumers have been cautions, and have increased savings and reduced debt burdens.
• Rates are likely to stay low at least in the short term, leaving consumers resilient and with spending power.
5
US households have increased savings and reduced debt
The coronavirus could weigh on the Chinese economy short-termShipping rates raise some questions regarding the Chinese recovery
The Chinese recovery could disappoint, especially given the coronavirus outbreak
Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea
• Chinese macro improved late-2019, but recent trends in “China plays” such as industrial metals and shipping rates suggest a more muted 2020 outlook.
• Chinese money and credit trends have not matched previous stimulus periods, which also points to a more tepid recovery in this cycle.
• The coronavirus adds additional (hopefully short-term) pressure on the Chinese economy, and will weigh on the now very large service part of the economy.
6
Global liquidity still supports marketsGlobally, company funding costs are at all time lows
• Despite seemingly tight labor markets, there is limited wage and inflation pressure, allowing central banks to leave monetary policy very accommodative.
• Corporate debt service costs have fallen to all time lows as both government yields and credit spreads have fallen. Households debt service costs are also low.
• In addition, the major central banks are still supporting markets by printing money to buy financial assets. In sum, this implies very supportive financial conditions.
Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea
Central banks: Easy policy continues with no rate hikes in sight
7
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Q1 Q2 Q3 Q4
Earnings growth,USA (S&P 500) forecast
Out of the earnings recession?
Earnings could be turning to growth in the US already…
Source: Refinitiv Datastream / Nordea
• Earnings growth may be stabilising already, as Q4 reports are arriving. If the normal pattern holds, growth in the US will end the quarter in the black.
• There are still numerous risks, but if leading indicators keep improving, we will get closer to a normal 5-8 % year for earnings growth.
• This is likely to have been the least impressive earnings recession in recent memory, partly helped by central banks.
…and global earnings estimates are stabilising
Source: Refinitiv Datastream / Nordea
8
0%
But the risk premium is still very attractiveValuations look very extended compared to post-IT crisis history
Equities look expensive if we only look at one side of the equation
Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea
• Most stand-alone indicators for equities look very extended and are closing in on post-IT bubble highs.
• However, relative to bonds most equity regions still seem very attractive and will stay so without a major contraction in earnings and/or increase in yields.
• Moreover, when the economy improves, equity risk premia tend to get squeezed via higher yields or higher P/Es further improving the trade-off.
*Earnings yield on global stocks less 10Y inflation-adjusted US Treasury yield
9
Not all investors have bought in to the rally Low cross asset volatility increases risks
• Strong price momentum combined with low volatility across asset classes means that systematic trading strategies have added risk and look stretched.
• Stretched positioning increases risks of a setback. Discretionary investors have on the other hand become more optimistic and have room to add risk.
• With current muddling through macro backdrop and easy central banks we think that the TINA-effect can continue to push investors into equities.
Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea
Sentiment appears stretched but not everyone is on board
10
Corrections and setbacks are normalRisks of a larger corrections seems low
• Current backdrop limits the risk of a larger correction since discretionary investors still have room to add risk.
• Though we see a large risk of e.g. a 4-6% pullback we do not expect a larger correction >10-15%. The coronavirus does however add downside risk.
• During the past 10 years corrections have been the normal where e.g. growth worries and/or technical factors have caused the correction.
Source: Refinitiv Datastream / Nordea Source: Refinitiv Datastream / Nordea
Elevated risks of a set back in risky assets
-
10
20
30
40
50
60
70
80
90
100
1990 1998 2000 2007 2011 2015 Q4 2018 Today
Other Liquidity Valuation Earnings Macro
11
Bear market indicator, index
Politics will still dictate market development short term
The trade conflict Brexit
• The strategic conflict will not disappear
during 2020, if even during Trump’s
presidency. The “Phase 1”-deal has
been signed but most tariffs are still in
place and uncertainty around
enforcement still persists.
• It is positive that tariffs are now being
removed rather than increased. We have
a positive bias given 2020 election year
and weaker economic growth.
• UK and EU are now ready to start
negotiations around the actual deal. The
deadline for the actual deal (end 2020)
needs to be extended by July 1st and
BoJo has clearly communicated that is
not going to happen. A simple deal
seems like the most likely.
• The Brexit risk will continue and there is
an increased risk of a “no-deal” by
accident.
2020 Presidential Election Hong Kong Protests European Political Risks Middle East Civil Unrest
• Europe will, with all
likelihood, continue to
be impacted by political
risks.
• Hong Kong/EM protests
is a risk, especially if an
economic stabilisation
don’t materialise.
• Chile protests (Transport
fares), Catalonia
Independence protests,
France (Yellow Vests), etc.
• Will Trump be re-elected?
Or impeached? The biggest
political event in 2020 will
create a lot of headlines.
• Middle East tensions are
(almost always) a risk to the
oil price
Source: iStock / Pearson Institute 12
Polls suggest Bernie Sanders as a candidate Predicting both outcome and market reaction can be difficult..
US elections a significant theme for markets in 2020
Source: Refinitiv Datastream / NordeaSource: PreditIT / Nordea
The S&P rose
following events that
indicated Trump was
less likely to win the
election
The S&P fell following events
that indicated Trump was
more likely to win the
election
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Firstpresidential
debate
Trumprecording and
SecondPresidential
Debate
FBI reopensits
investigationinto Hillary
Clinton
FBI closes itsreopened
investigationinto Hillary
clinton 2016
Election night:Until midnight
Election night:After midnight
Change in prediction of Trump winning election S&P return
13
0
0,1
0,2
0,3
0,4
0,5
0,6
15-07-2019 14-08-2019 13-09-2019 13-10-2019 12-11-2019 12-12-2019 11-01-2020
Elizabeth Warren Joe Biden
Bernie Sanders Donald Trump
Andrew Yang Michael Bloomberg
North America is expensive, but this did not prevent last year’s rally
Neutral across equity regions
Source: Refinitiv Datastream / Nordea
Strong returns in all regions
Source: Refinitiv Datastream / Nordea
• We find the regional game hard at this juncture. Many regions have significant up- and downside risks. Hence, we prefer to take our bets elsewhere.
• Normally, one would look to Europe, EM or Japan in a cyclically improving environment, but there both political and macro risks linger.
• There are a lot of risks that could tip the scales either way, e.g. Brexit, trade war, Hong Kong protests, and the recent corona virus outbreak.
14
Credit spreads are tight on historic terms in many segmentsMore attractive yields found only in risky bonds
• There has been strong demand for bonds and spreads have tightened. Spreads on highly rated corporate bonds are tight relative to history.
• The current, slowly improving cyclical environment will keep major DM central banks on hold and thus yields from falling much further.
• EM central banks, on the other hand, have room for further monetary easing. We keep our overweight in emerging market hard currency bonds.
Credits | Performance helped by spread tightening
Source: Refinitiv/ Nordea Source: Refinitiv/ Nordea
15
96%
97%
89%
87%
97%
87%
38%
86%
51%
0% 20% 40% 60% 80% 100%
EUR IG
US IG
Global HY
US HY
US HY BB
US HY B
US HYCCC
EUR HY
EMD $
share of time spreads have been wider during the past 10 years
Nordea Global Asset Allocation Strategy Contributors
Strategists
Sebastian Källman
Strategist
Sweden
Ville Korhonen
Fixed Income Strategist
Finland
Espen R. Werenskjold
Senior Strategist
Norway
Hertta Alava
Senior Strategist
Finland
Assistants
Mick Biehl
Assistant/Student
Denmark
Amelia Marie Asp
Assistant/Student
Denmark
Global Investment Strategy
Committee (GISC)
Antti Saari
Chief Investment Strategist
Finland
Johan Larsson
Chief Investment Strategist
Sweden
Kjetil Høyland
Chief Investments Strategist
Norway
Erik Bruce
Chief Investments Strategist
Norway
Andreas Østerheden
Senior Strategist (GISC Driver)
Denmark
Ansvarsreservation
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